Journey to Decentralized Governance: COMP
Years ago, the banking system entered our lives. It has played an important role in societal life since its inception. Despite the fact that it changed depending on the circumstances of the time during this process, a traditional banking structure has emerged. Against this traditional banking approach, new ideas and competitors emerge all the time. Along with the opportunities offered by blockchain technology, one of the decentralized solutions created against the classical banking system was offered to users by Compound. So, what exactly does Compound do?
Compound is a decentralized alternative to the banking system. In simple terms, banks are intermediaries that deliver the money of people who deposit their money to get interest, to people who want to get loans. Compound likewise enables De-Fi users to borrow and lend money with a decentralized application platform built on Ethereum via smart contracts.
Individuals deposit their cryptocurrencies into the pool of the system as if they were depositing them in the bank. In this way, they can earn interest on the system. Individuals in need of money can get loans with the money in the pool with the determined interest. This determined interest value is much lower than the interest values in the classical banking system. The interest rate in this case is determined by a mathematical algorithm based on supply and demand. This algorithm continues to be calculated regularly according to changes in the platform.
You might be wondering how a decentralized system manages collections in this situation. Collection risk is a major issue for Compound, as it is in traditional banking. Compound actually collects before lending in order to avoid collection issues. Users who want to get a loan must deposit more than the loan they will receive as collateral. When put that way, it may not appear logical. Why should I get a loan if I have more money than I will get loan?
For example, you needed money for some reason but do not want to sell and use your crypto money because you believe the value of your crypto money will rise. In this case, you can use your cryptocurrency as collateral to obtain a loan from the platform. This is how a compound works in general. So, how does Compound ensure administrative decentralization? How and who makes the system’s new decisions? Let’s get to know COMP, Compound’s governance token.
The COMP token was released with the aim of providing decentralized governance of Compound. Compound has not had decentralized administration since it came into existence. Although their product was decentralized, their administration was central. According to their vision, they planned to launch the product and have a centralized governance until they solve problems of product, and then take steps for a decentralized governance. To achieve this, they created the governance token called COMP. With this token distributed to the people using the platform, they aimed to be managed more decentralized by making more democratic decisions by a wider audience. So how is the COMP token distributed to users?
The COMP token has a limited supply. This supply amount was determined as 10 M. The entire supply will be released in a planned 4-year period, not as soon as it is released. Initially, they set aside 2.4M, or 24%, for the venture capitalists they received funding from. In addition, they allocated a share of 2.2M, or 22%, within the team that created the platform. These tokens are not distributed in one go. Again, they are distributed over a 4-year period. In this way, they aim to prevent manipulative movements by the team and investors and to gain the trust of the community. A 4% share is reserved for funding the people who will join the team and work in the future.
After talking about how tokens are distributed to the team and investors, let’s talk about how tokens are distributed to users. At this point, Compound chose a method of distribution that was equitable to both lenders and borrowers. Compound gives lenders the COMP token with interest, giving them both the right to have a say in governance and the opportunity to increase their income from the system. In this way, they aim to attract users to the platform and have a say in the governance. At the same time, it gives COMP tokens to users who get credit from the system, allowing them to have a say in the governance. To do this, 42% of the total supply, 4.2 M COMP tokens, is reserved.
COMP token holders can vote and approve or reject any changes to be made on the system. Each token gives one vote. Each token represents one vote. In this way, a decentralized model of governance has emerged.
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To summarize, Compound is a decentralized platform that provides the opportunity to lend and borrow between people. Thanks to this platform, those who want to get loans can get loans from the pool created by those who want to give loans. The COMP token is also used to decentralize this system. It distributes regularly distributed COMP to platform users. COMP token holders also have the right to vote on proposals for the change of the system.
